One area of Forex trading that has a language all to itself is in the world of margin. It seems that there is a whole list of terms specific to margin that deserve to be talked about as well. It might be helpful to keep a list of definitions of common words related to margin near to you at all times.
The term margin itself is the amount of money one must put up in order to open a leveraged position in the first place. The exact amount of money required for margin depends on the size of the position that one seeks to open, and the amount of leverage that the broker has to offer. If the broker is willing to give you 50 times your margin as leverage, then you would need $1,000 to open a $50,000 position in a currency pair. Of course, you never want to use all of your margin on a single trade, but you are already well aware of that fact.
This term is all about the amount of additional funds that a trader can trade in based on the amount of margin they have deposited into their account. It is one of the most important figures to keep in mind as it is the key to getting your money to start working for you. A broker may offer 10, 25, 50, or even 100 times your margin as leverage depending on a variety of factors including what the broker is comfortable offering you.
Unrealized P/L is the figure that shows how much your trade has gained or lost prior to you actually exiting the trade. If you are currently net positive on the trade, then your unrealized P/L will show a position number (often in green), and if you are losing money on the trade, it will show a negative number (often in red). Remember, you always start with a negative unrealized P/L because you have to deal with the spread of the trade. That said, your unrealized P/L does not become real until you decide to exit the trade.
The number of funds you have available in your account. That said, it doesn’t take into account any unrealized P/L that you may have on the account at any time. You need to factor that in when attempting to determine the “true value” of your account.
The margin requirement is shown as a percentage number and is reflected per position. It helps you best understand how much margin is required for any given position that you wish to enter. You should pay attention to this number before pulling the trigger on any trade as it is entirely possible that you will think twice before making one investment choice over another.
The amount of money that must be locked up to execute a trade is known as the required margin. It is the amount that you will not be able to use for additional trades at this time. You just need to have enough to meet the required margin to open the trade, but you should be aware that doing so can leave you without that same margin available for other trades or even available for withdrawal (until you exit all positions).
If the base currency is the same as your account’s currency:
Required Margin = Notional Value x Margin Requirement
If the base currency is different from your account’s currency:
Required Margin = Notional Value x Margin Requirement x Exchange Rate Between Base Currency and Account Current
This figure refers to the minimum amount of funds that must be maintained in your account to keep all of your current trades open. You should look at this as the barebones minimum that is required to maintain your account and not get called out for a margin call.
Used Margin is simply the Required Margin for ALL open positions.
Used Margin = Total Required Margin for ALL Open Positions
Your ability to determine the true value of your account is determined not only by the balance of your account but by the total equity available in that account. This means the balance plus any unrealized P/L that exists from the trades that you have placed. It is only when you put all of these things together that you can see how you are doing in the event that you were to exit all of your current positions.
If you have open positions:
Equity = Balance + Floating Profit (or Loss)
If you do not have any open positions:
Equity = Balance
The amount of money not tied up in trades at the moment is known as your free margin. It may be used for additional trades, or you can choose to withdraw it as cash from your account at any time.
Free Margin = Equity – Used Margin
A percentage calculation between your total equity and your used margin. If you have $5,000 worth of equity in your account, and you have just $1,000 in used margin, then your margin level would reflect as 500% (5,000 divided by 1,000). The higher the level, the more secure your account is from any issues with margin calls and the like.
Margin Level = (Equity / Used Margin) x 100%
Margin Call Level
Typically, the margin call level that most accounts fall under is 100%. If one’s margin level falls to 100% (or just below), they will very likely sustain a margin call that knocks them out of their open positions and locks in a loss on their account.
Margin Call Level = Margin Level at X%
This is the liquidation event that occurs when a trader has hit their margin call level and the broker is forced to sell some of their positions to cover the necessary margin requirements. This is the e-mail that no trader ever wants to see. Generally, they are warned before this happens, but they need to act quickly to increase the available funds in their account or else risk the potential of a margin call happening to them.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.